Shares of NVIDIA NVDA declined almost 14% after the company trimmed its fourth-quarter fiscal 2019 guidance yesterday. NVIDIA cited weakness in the gaming and data center spaces to be the primary reason behind the guidance cut. The company warned “deteriorating macroeconomic conditions, particularly in China” to be a major headwind.
The company’s previous revenue estimate of $2.7 billion (+/- 2%) was reduced to $2.2 billion (+/- 2%) for fourth-quarter fiscal 2019, indicating a fall of 24% year over year and a 31% plunge sequentially.
Moreover, the company revised its guidance for non-GAAP gross margin, which is now expected to be 56% compared with the earlier view of 62.5%. Margins will be impacted by around $120 million in charges for excess DRAM and other components owing to the current market conditions besides the updated revenue guidance, adds NVIDIA.
In a note to investors NVIDIA’s CEO said: “Q4 was an extraordinary, unusually turbulent, and disappointing quarter.” Notably, slowdown in China, which is intensified by the ongoing trade war with the United States is the major concern for technology companies. Apple had earlier cut its first-quarter fiscal 2019 outlook over soft iPhone sales, primarily due to weak demand in Greater China.
Further, NVIDIA's lower view has hit other chip stocks. Notably, Advanced Micro Devices AMD, Mellanox Technologies and Micron Technology MU decreased 7.98%, 3.05% and 2.26%, respectively, on Monday.
What’s Going Wrong
NVIDIA’s outlook for the fiscal fourth quarter, shared on last earnings call, indicated its suspension of mid-range Pascal GPU shipments in order to normalize channel inventory levels following the crypto-currency boom. Although the channel inventory has been in line with management’s expectations, sluggish consumer demand for gaming GPUs due to sharp deceleration in China, has taken a toll on the chip giant.
Additionally, high price of its high-end RTX GPUs have led consumers to delay their purchases as they wait for lower prices and ray tracing technology to become more widely available.
Furthermore, NVIDIA mentioned that many of its data center deals did not close in the last month of the quarter as economic uncertainties made customers increasingly cautious. The company, which generates nearly one-third of its revenues from this segment, will be badly hurt by this.
Notably, Intel’s INTC revenues missing estimates in its recently reported quarterly results also compelled the company to issue a tepid guidance for the first quarter citing a bleak data center as one of the main reasons. The company anticipates Data-centric business to be down in low-single digits on account of softness in NAND pricing and sluggishness in data center demand. Its data center revenue growth has slowed down given the shift in data centers from buying capacity to absorbing existing capacity.
However, NVIDIA’s confidence in its strategies and growth opportunities in ray-traced gaming, rendering, high-performance computing, AI and self-driving cars, is something to look forward to.
All eyes are on NVIDIA’s fourth-quarter fiscal 2019 results, scheduled to be reported on Feb 14. Stay Tuned!
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NVIDIA currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here
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